Investors are a bunch of irrational, short-sighted idiots, right?
Well, maybe not so much.
Lately, one of the unusual phenomenon in the markets is the rally in stocks while near-term earnings growth expectations remain weak. We ran a chart reflecting this.
FactSet’s analysts recently addressed this:
Given the decline in earnings expectations for Q1 2012, what has driven the rally in the S&P 500 over the past three and a half months?
One possible explanation is that the market is looking ahead to the rebound in earnings growth projected for late 2012 and early 2013.
Here’s FactSet’s chart.
So, is it possible that investors are finally thinking for the long-run? That would be awfully rational of them.
But FactSet isn’t alone with this theory.
Goldman Sachs’ Abby Joseph Cohen noted this as well in a recent interview on Bloomberg.
“What really matters, though, is whether investors are saying to themselves now, we’re looking not just at this quarter but to the remainder of 2012 and into 2013. Investors seem to be much more comfortable about the intermediate term in the United States than they were even just a few weeks ago,” she said. “That is the sign of a continuing bull market.”
As long as most investors think for the long-term and the long-term outlook looks bright, then you can probably expect the rally to continue.